U.S. firms shine in GPIF revamp of equity roster

U.S.-affiliated money managers and firms that handle transition management appear to be the big winners in the recent wholesale restructuring of the Tokyo-based Government Pension Investment Fund's ¥4.7 trillion ($45 billion) allocation to actively managed domestic equities.

The record reshuffling the GPIF announced April 4 — with 10 new managers hired and eight terminated — left the domestic equity lineup for the world's largest pension fund sporting a “made in America” look.

Nine of the 14 firms the $1.24 trillion GPIF selected to pick Japanese stocks are either based in the U.S. — Capital International Inc., Goldman Sachs Asset Management, Dimensional Fund Advisors, Russell Implementation Services Inc., Harris Associates and Taiyo Pacific Partners — or are the Tokyo-based arms of U.S. managers: FIL Investments (Japan) Ltd., a unit of Fidelity Investments; J.P. Morgan Asset Management (Japan) Ltd.; and Invesco Asset Management (Japan) Ltd.

Two of the eight terminated managers also have ties to firms outside Japan — BlackRock Japan Co. Ltd. and Amundi.

The latest lineup should put to rest any lingering fears of Japanese institutional investors playing inside baseball, according to some market veterans. “The home bias is all gone and best of class will prevail,” said one executive of a foreign firm hired by GPIF who declined to be named.

In the announcement, GPIF officials said the newly hired active domestic equity managers were consciously drawn from a “wide range of investment strategies” though only one — focused on “increasing shareholder value via engagement with company management” — was mentioned.

That firm is Kirkland, Wash.-based Taiyo Pacific Partners, which has $2.5 billion in assets under management. Brian K. Heywood, Taiyo founder and CEO, said the fact that his boutique, which focuses on “friendly” shareholder activism, successfully came through the GPIF's thorough yearlong vetting is a sign of just how aggressively the pension fund's staff is considering new ideas now.

He declined to provide any details on his firm's GPIF mandate. Executives at other GPIF-selected firms also declined to comment on any aspects of their assignments.

In another break from tradition that could be good news for managers, the GPIF said it has “introduced a performance-based fee structure for some active managers,” based on rolling three-year returns against the manager's benchmark.

For its fiscal year ended March 31, 2013, the GPIF reported paying fees of $58 million to external firms managing $172 billion in domestic equities — split 78% passive and 22% active — for an average fee of four basis points.

However, BlackRock Japan was the only manager with ties outside Japan to be selected April 4 for a passive domestic equity mandate, alongside DIAM Co., Sumitomo Mitsui Trust Bank Ltd., Mitsubishi UFJ Trust and Banking Corp. and Mizuho Trust & Banking Co. Ltd.     

In light of the fund's traditionally low fee arrangements, however, industry veterans said any room to top up fees on the strength of delivering above-market returns would be significant for a book of business where managers are averaging more than $3 billion each in GPIF assets.

Tokihiko Shimizu, the GPIF's Tokyo-based director of research, confirmed in an e-mail that firms in the newly announced lineup already are managing domestic equities for the fund, but declined to give details on specific mandates.

The GPIF publicly reveals the size of its mandates to specific managers in its annual report for the fiscal year ended March 31, which has not been published yet.

Foreign managers have long overseen the bulk of the GPIF's international equity and bond allocations, but the fact that they now outnumber the list of local stock pickers — Nikko Asset Management Co., Nomura Asset Management Co., DIAM Co. and Mizuho Asset Management Co. — for the domestic active equity portfolio as well is a change from previous years.

For the fiscal years ended March 31, 2012, and March 31, 2013, eight Japanese and four foreign managers were overseeing active domestic equities for the GPIF, with the local managers responsible both years for 62% of the portfolio.

In addition to the manager lineup, the GPIF announced other measures aimed at tuning up an investment engine the government of Prime Minister Shinzo Abe is eager to move into high gear — having essentially condemned the long-standing safe and sound approach anchored on Japanese government bonds as no longer appropriate for retirees or the broader economy.

The GPIF diversified its benchmark index lineup beyond the TOPIX index of all companies on the Tokyo Stock Exchange's first section. It opted for the recently launched JPX Nikkei 400 index, focused on companies with high return on equity as the benchmark for as much as $50 billion of its $160 billion allocation to passive managers, while adding smart beta benchmarks for the first time as well.

On balance, market veterans said the GPIF's moves are healthy but incremental — as might have been expected in a political culture that famously seeks consensus on major decisions.

The changes afoot now should be seen as the “typical Japanese groundwork being done to allow for greater changes” down the road, noted one senior executive with a foreign-owned money management firm who declined to be named. “This is the first step” of what they're hoping to do in Japan, he said.

In an e-mail, Mr. Shimizu said the GPIF expects its new domestic equity approach and manager lineup to deliver improved returns and have broader ripple effects as well, such as promoting the development of new smart beta strategies and better corporate governance.

Even if the GPIF's shareholder activist allocation is small, “we're convinced it will improve the managing and operation of companies,” he said.

On April 9, the GPIF took another step, issuing a request for proposals from money managers interested in being selected to oversee the pension fund's 11% ($139 billion) target allocation to foreign bonds. For the first time, the GPIF called on managers of emerging markets debt, high-yield and inflation-linked bonds to apply as well.

A planned review of the GPIF's asset allocation targets later this year could prove to be the most effective chance to boost the giant fund's returns.

In June 2013, the GPIF changed its asset allocation targets, effectively bringing them in line with actual allocations that already were running up against their rebalancing ranges.

At that time, the fund's target for domestic stocks was boosted to 12% from 11%, but allowed to move six percentage points on either side of that target. The GPIF's latest results for the quarter ended Dec. 31, 2013, showed domestic equities accounting for 17.22% of its total portfolio.